Coupon Rate vs. Discount Rate: What's the Difference?
Edited by Janet White || By Harlon Moss || Published on December 6, 2023
Coupon rate is the annual interest rate paid on a bond, while discount rate is the interest rate charged by central banks on loans to commercial banks.
Key Differences
The coupon rate is the interest rate that a bond issuer pays to a bondholder, calculated as a percentage of the bond's face value. The discount rate, on the other hand, is the interest rate set by a central bank, like the Federal Reserve, for lending to commercial banks.
A bond's coupon rate is fixed at issuance and determines the periodic interest payments made to bondholders. The discount rate influences the cost of borrowing for banks and, indirectly, the interest rates for bank loans to consumers and businesses.
The coupon rate directly affects the return an investor earns from holding a particular bond. In contrast, the discount rate has a broader economic impact, influencing overall credit availability and economic growth.
Changes in the coupon rate are not common and reflect the terms agreed upon at the bond's issuance. The discount rate, however, can be adjusted by the central bank as a tool for monetary policy to manage economic stability.
The coupon rate reflects the credit risk and market conditions at the time of a bond's issuance. The discount rate, conversely, is a tool for controlling money supply and is adjusted in response to various macroeconomic factors.
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Comparison Chart
Definition
Annual interest rate paid on a bond
Interest rate charged by central banks on loans to banks
Primary Function
Determines bondholder's periodic interest earnings
Influences overall borrowing costs and economic policy
Variability
Fixed at issuance, rarely changes
Frequently adjusted by central banks
Economic Impact
Direct impact on bond's return
Broad impact on credit availability and economic growth
Determination Factors
Based on bond terms and market conditions at issuance
Set by central banks based on macroeconomic considerations
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Coupon Rate and Discount Rate Definitions
Coupon Rate
Coupon rate is fixed at the time of bond issuance.
Despite market changes, the bond's coupon rate remained at 4% as set at issuance.
Discount Rate
Discount rate is a tool for monetary policy.
To stimulate economic growth, the central bank lowered the discount rate.
Coupon Rate
Coupon rate determines the periodic interest payments on a bond.
With a coupon rate of 3%, the semiannual payments on the bond were $15 per $1,000.
Discount Rate
Discount rate adjusts in response to economic conditions.
In response to economic downturn, the central bank cut the discount rate.
Coupon Rate
Coupon rate affects the market price of a bond.
As market interest rates rose, bonds with a lower coupon rate like 2% traded at a discount.
Discount Rate
Discount rate impacts the money supply and credit availability.
An increased discount rate resulted in tighter money supply and credit conditions.
Coupon Rate
Coupon rate is the yearly interest rate paid by a bond's issuer to its holder.
The 5% coupon rate on the corporate bond meant an annual return of $50 per $1,000 face value.
Discount Rate
Discount rate is the interest rate central banks charge on loans to commercial banks.
The Federal Reserve raised the discount rate to curb inflation.
Coupon Rate
Coupon rate reflects the issuer's credit risk at issuance.
High credit risk of the issuer led to a higher coupon rate of 6% on the bond.
Discount Rate
Discount rate influences overall borrowing costs in the economy.
A lower discount rate led to reduced loan interest rates for consumers and businesses.
FAQs
What does the coupon rate indicate in a bond?
The coupon rate indicates the annual interest rate the bond will pay.
How is the discount rate set?
The discount rate is set by central banks, like the Federal Reserve.
What is the main purpose of the discount rate?
The main purpose of the discount rate is to influence overall borrowing costs and control monetary policy.
How does the coupon rate affect a bond's market price?
The bond's market price can fluctuate based on how its coupon rate compares to current market rates.
Can the coupon rate change after bond issuance?
Generally, the coupon rate is fixed and does not change after issuance.
Does the discount rate directly impact consumers?
The discount rate indirectly impacts consumers by affecting loan interest rates offered by banks.
What factors influence the setting of a coupon rate?
Factors like issuer's creditworthiness, market interest rates, and economic conditions influence the setting of a coupon rate.
Are coupon rates the same for all bonds?
No, coupon rates vary depending on the bond's issuer, credit risk, and market conditions at issuance.
What happens when a central bank changes the discount rate?
When the discount rate changes, it affects the cost of borrowing for banks and can influence the broader economy.
Is the coupon rate relevant for zero-coupon bonds?
Zero-coupon bonds do not have a coupon rate; instead, they are sold at a discount and pay at face value at maturity.
How do investors assess the attractiveness of a bond's coupon rate?
Investors compare the bond's coupon rate to current market rates and assess the issuer's credit risk.
How does the discount rate affect inflation?
The discount rate can influence inflation by controlling the money supply and borrowing costs.
Why might a central bank raise the discount rate?
A central bank might raise the discount rate to control excessive economic growth and inflation.
Can the coupon rate be negotiated?
The coupon rate is set at issuance and is not typically negotiable afterward.
Does the discount rate affect all types of loans?
The discount rate primarily affects short-term loans between central banks and commercial banks.
Is the discount rate the same across all countries?
No, each country's central bank sets its own discount rate based on its economic conditions.
Can the discount rate be used to stimulate a sluggish economy?
Yes, lowering the discount rate can stimulate a sluggish economy by making borrowing cheaper.
What is the relation between coupon rate and bond yield?
Bond yield is the effective rate of return based on the bond's market price, which can differ from its coupon rate.
Are high coupon rates always desirable for investors?
High coupon rates are desirable, but investors also need to consider the issuer's credit risk and market conditions.
Does a change in the discount rate affect existing loans?
A change in the discount rate does not typically affect existing fixed-rate loans but can affect new loans and variable-rate loans.
About Author
Written by
Harlon MossHarlon is a seasoned quality moderator and accomplished content writer for Difference Wiki. An alumnus of the prestigious University of California, he earned his degree in Computer Science. Leveraging his academic background, Harlon brings a meticulous and informed perspective to his work, ensuring content accuracy and excellence.
Edited by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
